A Little Less Bullishness For Google

In a couple of previous articles related to Internet search company Google (GOOG) posted on April 15, 2012 and May 25, 2012, bull-put credit spreads were considered for the company. A bull-put credit spread may be entered for a credit by selling one put option and purchasing a second put option further out-of-the-money with the goal of the options expiring worthless and retaining the initial credit as a profit. The first bull-put credit spread was successful and provided a return of 7% (70.5% annualized).

The second bull-put credit spread considered consisted of a short 2012 Jun 540 put option and a long 2012 Jun 515 put option. The position was entered for a net credit of $1.77, which represented a potential return of 7.6% (126.4% annualized). A management point of $565 was set for the position, which has been breached (shown below), so consideration for an exit or a roll is given. Additionally, since there’s only 4 days until June option expiration, consideration is given for modifying the management point and maintaining the position as is.

Google’s swooning stock price is probably due to some negative news related to Google Maps not being used as a built-in feature for Apple’s (AAPL) iPhones and iPads was recently released. Apple is also making it easier for users to use Facebook (FB) instead of Google’s competing offering.

If Google’s earnings release was not on the horizon (probably middle of July), then with four days until expiration, modification of the management point could be implemented. However, with Google’s forthcoming earnings release, if the position were to get into trouble, then it would probably have to be rolled to July options expiration which will most likely expire after Google’s next earnings release. It would not be a good situation to be in a July bull-put credit spread while Google is spilling its beans.

Since standing pat and modifying the management point is not a consideration, then exiting the position is analyzed. To exit the 2012 Jun 515/540 bull-put credit spread would require a net debit of $0.37 as found by PowerOptions tools and as shown below:

Since the initial position was entered for a net credit of $1.77, the position can be exited for a profit of $1.40 ($1.77-$0.37), which represents a return of 6% (122% annualized). Based on this, an exit appears in order, as rolling to July with Google’s forthcoming earnings release is not wise. However, a protected covered call or collar may be considered for Google, since a poor earnings release and subsequent drop in stock price would be covered by a protective put. A protected covered call may be entered by selling a call option against Google’s stock and using some of the proceeds from selling the call option to purchase a protective put option as insurance.

Using PowerOptions tools, a multiplicity of protected covered call positions for July are available for Google with a maximum potential loss of less than 8% as shown below:

The maximum potential loss of 8% is used as a search parameter, as a loss of 8% or less can typically be recovered fairly quickly using option income generating strategies.

The highest returning position looks attractive with a potential return of 3.1% (29% annualized) and a maximum potential loss of 7.8%. So, even if the price of the stock drops to zero, the maximum potential loss is 7.8% (at expiration).

The specific call option to sell is the 2012 Jul 565 at $25.20 and the put option to purchase is the 2012 Jul 505 at $6.00. A profit/loss graph for one contract of the Google protected covered call is shown below:

For a stock price below the $505 strike price of the put option, the value of the protected covered call remains unchanged (at expiration). If the price of the stock increases to around $625, the position can most likely be rolled in order to realize additional potential return.